New Issues Boost CMBS Outlook

NEW YORK CITY-A rising tide lifts all boats, even when some of those boats are taking on water. That’s the conclusion to be drawn from the more positive forecasts for CMBS delinquencies being issued by ratings agencies as 2011 gets under way.

Fitch Ratings is now saying late-pays on CMBS loans will peak at or near 10%, a notably sunnier outlook than the agency’s original forecast of a 12% delinquency rate by 2012. One of the factors Fitch cites is the projected increase in new CMBS issues this year: as much as $50 billion, according to the Wall Street Journal, compared to $11.6 billion in 2010. That ’10 tally, while only about 5% of the $230 billion of CMBS issues during the peak year of 2007, nonetheless represents a fivefold improvement on 2009.

This resurgence of new CMBS should help offset amortization and repayments, keeping the universe size relatively stable, says Fitch. In addition, managing director Mary MacNeill says in a release, “Property market fundamentals are stabilizing and liquidity is returning to the market, allowing special servicers to resolve an increasing number of loans.”

Similarly, a report last week from Standard & Poor’s cites “positive news for CMBS,” as market participants have been revising upward their ’11 issuance forecasts, “while at the same time moderating their predictions for the increase in the sector’s delinquency rate during this year.” S&P refers to an article earlier this month in Commercial Mortgage Alert which reported that the average CMBS forecast for this year was $39 billion, compared with actual ‘10 issuance of just under $12 billion.

“Some commentators think delinquencies will peak at 10%-12%, not far above the current level of just over 9%,” S&P says. “Several recent favorable reports on commercial real estate activity support this view of stabilization in CMBS credit.”

As it stands, however, the delinquency rate among legacy CMBS is considerably higher than a year ago. How much higher depends on who’s measuring it: Fitch says ‘10 ended with a delinquency rate of 8.23%, down from a high of 8.66% in September, while Moody’s Investors Service says late-pays among conduit/fusion transactions increased 16 basis points in December to 8.79. For the year, the delinquency rate increased 79% from 4.90% at the end of ’09, according to Moody’s, which notes that the rate of increase in the delinquency rate slowed considerably in the second half of ‘10.

Moody’s says that although it expects the delinquency rate to continue rising in 2011, it will be at a slower pace than it has over the past two years. “The rate of increase in newly delinquent loans is likely to continue moderating in the coming year as capital markets continue to heal and the flow of loans into special servicing slows,” Moody’s managing director Nick Levidy says in a release. The agency says its Delinquency Tracker index is expected to finish ‘11 in the 9.5% to 11% range.

Looking back over the past year, Fitch says that the Midwest had the smallest delinquency increase among the four US regions, up 312 bps, while the West saw the largest, a 458-bps rise. However, the South has the highest regional delinquency rate at 11%, although the state with the highest CMBS delinquency rate is, unsurprisingly, Nevada at 28.99%. Among the four regions, the East is the best performing with a 6.7% delinquency rate.